Bank Efficiency, Regulation, and Response to Crisis of Financial Institutions in Selected Asian Countries

Abstract

This paper studies the determinants of efficiency of banks in the Southeast Asian countries of Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. The study, which covers nearly 600 banks from 1994 to 2008, adopts the two-stage least square fixed-effects (FE2SLS) and two-stage least square random-effects estimators (RE2SLS) as provided by Baltagi (2001) to address individual bank heterogeneity and endogeneity issues related to bank efficiency. It focuses on three key areas: (1) bank-specific activities such as off-balance sheet activities of banks, (2) financial liberalization through foreign participation and ownership, and (3) impact of bank regulation and supervision. The results of the paper indicate that off-balance sheet activities tend to reduce bank efficiency. The foreign participation and ownership in the financial markets tend to increase bank efficiency. Bank regulation in restricting activities on non-interest income and authority of official supervision tends to improve bank efficiency. Bank supervision through the intensity of private monitoring of the financial markets tends to reduce bank efficiency. The results of the paper indicate that bank regulation and supervision will be crucial to improve the efficiency of the banks and stability in the financial markets in the Southeast Asia.